straddle

A straddle is an options trading strategy in which an investor holds both a call option and a put option on the same underlying asset, with the same strike price and the same expiration date. The position is designed to be neutral with respect to direction, profiting from a substantial move in the underlying price in either direction or from an increase in volatility.

In a long straddle, the investor buys both a call and a put. The payoff at expiry is max(S-K,0) + max(K-S,0) minus the total premium paid. The breakeven prices are K plus and minus the total premium. The strategy offers unlimited upside if the asset moves far in either direction, while the maximum loss is the total premium paid. Long straddles are more attractive when implied volatility is expected to rise or when large price movements are anticipated but direction is uncertain.

In a short straddle, the investor sells both a call and a put, collecting the premiums. The profit is limited to the collected premium, while potential losses are substantial if the underlying makes a large move beyond the breakeven points. Short straddles are used when the trader expects low volatility or a stable trading range.

Related concepts include the strangle, which uses different strike prices, and various calendar or diagonal adjustments that alter expiration. Variants may combine with considerations such as dividends, interest rates, and transaction costs. Practical considerations include liquidity, bid-ask spreads, and the impact of time decay and changes in volatility on option values.